CapMan issued ambitious growth targets in the CMD

Translation: Original comment published in Finnish on 9/8/2022 at 6:11 am.

CapMan organized a CMD yesterday where it updated its strategy and its financial targets. No major changes were made to the main policies of the strategy, but focus will shift more toward growth and sustainability. We did not change our estimates based on the CMD, but the event once again supported our view of the company's good growth outlook. Our current estimates are below CapMan's own growth targets, which we consider justified as the company's objectives are very ambitious and partly dependent on acquisitions. You can watch a recording of yesterday’s CMD on InderesTV. In the following paragraphs, we discuss our key findings of the CMD in more detail.

The new growth target is ambitious

CapMan's strategy still relies on high-quality investment products in the unlisted market and the role of sustainability is emphasized here in the future. The quality of the company's products has taken a clear step forward in 2017-2022, and currently about 80% of the funds generate more than the hurdle rate (2017: 40%). A key change to the previous strategy was a clear increase in growth targets. In the new strategy period, the company will seek stronger growth with the aim of increasing AUM from about 5 billion currently to 10 billion over the next five years. The target is surprisingly aggressive if it is done organically, as it requires an increase of almost 50% in annual net subscriptions from some EUR 650 million/year in recent years. The company also raised the growth target for its Management Company and Service business before carried interest income to over 15% on average (previously +10%). This is, of course, in line with the doubling of the AUM. We note that the growth target is not an organic growth target but may include acquisitions.

Acquisitions more strongly part of the growth strategy

In its strategy update, the company also said that acquisitions and/or arrangements play a more significant role in the company's growth strategy. The company has already spoken about this, but now it was also added to the publicly expressed strategy and growth targets are partly dependent on this. In corporate arrangements, CapMan primarily seeks new teams/products rather than distribution power. We believe that accelerating growth, especially in Infra (e.g. energy or forest), would be a logical addition to the company. Acquisitions are sought in the Nordic countries while the company is also open to larger arrangements. We find this important because we see larger arrangements as a realistic path to take CapMan to the next size class.

Eyes also more firmly fixed on profitability based on recurring earnings

As a whole, we felt that the message of the CMD was positive and supports our view of the company's strong growth outlook. As a specialist in alternative investments, CapMan has positioned itself well in the trends of the asset management market, and the clear level increase achieved by the company in its products provides a good basis for growing new sales. In its new strategy, the company also pays pleasingly much attention to profitability based on recurring earnings and aims to achieve over 40% profitability based on recurring earnings from the Management Company and Service business in 2026 which is in line with our estimates.

The average ROE target was kept at 20% and the equity ratio target was lowered to 50% (previously 60%). Lowering the equity ratio is logical as the company wants to increase its leeway in light of possible arrangements. The dividend target remained unchanged and the company seeks annually growing dividend.

We did not adjust our estimates

The CMD did not give rise to any changes in our current estimates. Our 2026 AUM estimate is about 8 billion, which is below the company's 10 billion level. This is, however, justified because the level the company is aiming for is very ambitious and we believe it requires not only acquisitions but also excellent success in implementing the growth strategy. In the next few years, we expect the company’s AUM and recurring earnings to grow by about 10% p.a. However, earnings do not grow significantly in our estimates over the next few years due to investment income normalizing from exceptionally high levels. The strong growth in the Management Company and Service business is largely buried under the normalization of investment income in Group figures. For carried interest our estimates are still relatively conservative, but we consider this justified due to the challenging market situation and weak visibility into carried interest income. The earnings mix will improve significantly and the share of profitability based on recurring earnings will rise to about 40% of the total result (2021: 20%).

Based on the CMD, it is obvious to us that the company's own targets are clearly above our earnings estimates. We believe the biggest difference comes from carried interest income and, to some extent, from the faster growth of recurring earnings. If the company meets its objectives, there is a clear upside in our estimates.